- Continue to expect the CAD to underperform other G10 currencies in this next expected phase of USD weakness, based on the terms of trade/real income reversal story and the fact that Canadian economic data is only just starting to deteriorate, i.e., slower than elsewhere.
- Expect the USD/MXN to remain volatile trading in line with global swings in risk appetite. While expect the MXN to trade lower during 1H 2009— particularly if the central bank resists the pressure to cut rates soon maintaining an attractive differential that may help to attract some flows—the complex global economic and financial environment and in particular the substantial deterioration in Mexico’s growth outlook caused by the US recession will affect fundamental MXN drivers, definitely limiting a further MXN recovery.
- USD/BRL will likely be a beneficiary of a modest renewal in risk appetite. The pair encountered difficulties in breaking above 2.49 (the 38.2% retracement from the 2002 move lower). Potential now exists for a move to 2.00 during 1Q 2009. Despite the expected rally, the pair will likely continue to demonstrate extreme volatility as the financial crisis dents global demand into 2009.
- The temporary sources of support for the USD seen in recent months have clearly faded, and the EUR/USD selloff has been reversed. The downside risks to the USD posed by the pursuit of quantitative easing in the United States will likely continue to push EUR/USD higher in the near term. Furthermore, capital is becoming increasingly scarce and difficult to attract, and the large current account deficit of the US relative to the Eurozone should also provide some additional support for EUR/USD in 2009.
- The outlook for GBP is not bright. The sharp decline in yield support has weighed heavily, and the potential for quantitative easing to reach the shores of the UK and resultant decline in real returns could exacerbate the selloff of GBP. In addition, the external financing needs of the UK are likely to be more difficult to meet in 2009 as capital becomes increasingly scarce, adding further pressure to the currency throughout the new year.
- SEK has historically experienced significant depreciation during periods of financial turmoil such as in the aftermath of the Russian bond default of 1998 and the bursting of the dot.com bubble, as investors avoid the illiquid currencies of small countries (a currency substitution effect). The Swedish currency has experienced a similar phenomenon during the current financial crisis with EUR/SEK continuing to hit new record highs. In addition, the monetary “u-turn” of the Riksbank has done the Swedish currency no favours. However, a reduction of financial turmoil should eventually mitigate and reverse the currency substitution effect, and expect a return by end-2009 for EUR/SEK towards 9.50, the upper end of the range that has contained the pair since early 2001.
- Like its Scandinavian cousin, SEK, NOK has depreciated considerably during the financial crisis as the relatively illiquid currencies of small countries have suffered. NOK losses have been compounded by the sharp fall in oil prices. However, the investment practices of the government pension fund largely mitigate the long-term effect of oil prices on the value of the currency. With additional stabilization in financial markets expected in 2009, look for EUR/NOK to return to 8.40 in 1H 2009 before declining further in the second half of the year.
- The yen will remain vulnerable to risk appetite developments but should weaken during 2009. Near term, risk reductions and repatriation should occasionally push the yen higher. Still, central banks’ monetary easing steps will probably improve global liquidity conditions. Thus, any panicky yen surge should not be sustainable. By mid-2009, improving risk appetite should begin to accelerate capital outflows. Moreover, expectations of an eventual US Fed rate hike before the BoJ should help maintain an upward trend in USD/JPY later in 2009.
Global Currency Outlook - 12/21/08
December 22nd, 2008 · No Comments
Tags: Forex Market
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